Supreme Court to Weigh In on Debtor's Exemption Rights

Submitted by Jen Jones on Mon, 05/11/2009 - 2:58pm

Supreme Court to Weigh In on Debtor's Exemption Rights

In its next term, the Supreme Court will decide the case of Schwab v. Reilly, USSC Docket No. 08-538, which will resolve an important issue related to debtors' exemption rights in bankruptcy. The case involves the bankruptcy petition of Nadejda Reilly. Reilly ran her own catering business in Pennsylvania. In April 2005, she filed a bankruptcy petition under Chapter 7. In the petition, she listed certain personal property as "business equipment,- assigned it a value of $10,718, and claimed it was fully exempt from the bankruptcy. A bankruptcy trustee normally has only 30 days to object to a debtor's exemption claims. The trustee in this case, William Schwab, did not object to Reilly's claim within this time period. A later appraisal of the property showed it was actually worth $17,200. So, in August 2005, some four months after the 30-day objection period had expired, Schwab moved to sell the property, arguing Reilly's creditors were entitled to the difference between the exemption amount she had claimed and the property's actual value. Reilly filed an objection, arguing that, regardless of the actual value of the property, Schwab could not sell it because he had failed to make a timely to her claim that the property was fully exempt. The bankruptcy court agreed with Reilly, finding Schwab's failure to object within 30 days to Reilly's original exemption claim precluded him from selling the property at a later time. Schwab appealed the decision, first to the U.S. District Court for the Middle District of Pennsylvania and then to the U.S. Court of Appeals for the Third Circuit. He lost both times, as the higher courts agreed with the bankruptcy court that Reilly was entitled to keep the property at its full value. Specifically, the Third Circuit ruled: "Where, as here, the debtor indicates the intent to exempt her entire interest in a given property by claiming an exemption of its full value and the trustee does not object in a timely manner, we hold that the debtor is entitled to the property in its entirety.- Schwab then made a final bid to the U.S. Supreme Court, asking it to weigh in on the matter. The issue is ripe for review because there is currently a sharp division among the lower federal courts as to whose interest prevails in such a situation. Last week, the high court agreed to decide the case. It will consider two issues: (1)When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, is the exemption limited to the specific amount claimed, or do the numbers being equal operate to "fully exempt- the asset, regardless of its true value? (2)When a debtor claims an exemption using a specific dollar amount that is equal to the value placed on the asset by the debtor, must a trustee who wishes to sell the asset object to the exemptions within the thirty day period of Rule 4003, even though the amount claimed as exempt and the type of property are within the exemption statute? The court will hear oral arguments in the case when its next session begins in October.

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